Thursday, July 9, 2009

The Republican members of the House Oversight Committee have issued a 29 page report dealing with the subprime meltdown. You can find it here. While it does tell the tale, it goes nowhere near far enough in many respects. It does not do enough to highlight the foreseeability of this mortgage meltdown, nor does it do enough to highlight the culpability of Democrats in the House and Senate, Barney Frank in particular. (For more on those topics, see my post, Hurricane Subprime) Most importantly, the House report does not put the mortgage meltdown in the larger context of economic meltdown we are facing today.

As the report sums up:

The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans. This intervention began with two government-backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses. Government intervention also created “affordable” but dangerous lending policies which encouraged lower down payments, looser underwriting standards and higher leverage. Finally, government intervention created a nexus of vested interests – politicians, lenders and lobbyists – who profited from the “affordable” housing market and acted to kill reforms. In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate. However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy. While government intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention.

All of that is good for as far as it goes, but this report simply is far too narrow. Republicans still are not putting the "subprime meltdown" in the context of the larger economic meltdown that we are facing. They are still ceding to the Democrats by their silence the larger narrative of Democrats that our economic crisis is ultimately a failure of capitalist markets and caused by deregulation.

None of that is true. At the heart of the subprime meltdown was social engineering through government regulation. Without the subprime meltdown, we simply do not suffer our current economic crisis. That was the big domino that has knocked down all the other dominos. The failure of bond rating companies to accurately assess the risk of mortgage backed securities was a related major culprit. Mark to market accounting rules then made this whole matter exponentially worse, creating a market value of zero for a significant portion of mortgage backed securities. I could go on, but I am so tired of screaming about this while our Republicans in Congress - those who should be doing the screaming - sit on their thumbs.

Unfortunately, Obama is using the left's narrative for a massive expansion of government control of our economy. He is even pushing a vast expansion of the CRA and racially charged lending requirements. It is insanity. It is like prescribing a diet of butter and lard for a heart attack victim. But it will happen if this is the best the Republicans can do as a counternarrative. And if so, we are in deep trouble.